Column: UK’s long wait – for Carney and recovery
By James Saft
(Reuters) – Britain may well come to regret the exceptionally long gap between Governor of the Bank of England-to-be Mark Carney’s appointment in November and his first day on the job in July.
Widely seen as a central banking superstar (a role not without its dangers), Carney is credited with helping to steer Canada’s economy through the financial crisis and its aftermath with its banking system and reputation intact.
But one cost of bagging Carney as the successor to Mervyn King was a very long run-in of more than seven months, during which Britain has lurched towards and away from recession all the while giving the impression of an economy more punch drunk than strengthening.
The rate-setting Monetary Policy Committee of the BOE is widely expected to do very little when it votes this Thursday, missing an opportunity to cut rates from the record low 0.50 percent where they have sat for four years. It is also very unlikely the BOE will increase its quantitative easing bond-buying plans or further follow up or expand on its efforts to channel credit to households and businesses.
Looked at narrowly, another month or two of inaction, while a contrast to the comparative activism of the Bank of Japan and even the European Central Bank, is not that bad. The very recent run of economic data in Britain has been mildly encouraging, dampening fears that the country was listing towards its third recession since 2008. Surveys of businesses showed some strength in the dominant services sector and very slight contraction in manufacturing and construction. As well, GDP expanded in the first quarter, confounding minority expectations of a new slide into recession.
Take two steps back and the somewhat quiet period before Carney’s ascendancy, if that is what his era turns out to be, is slightly more troubling. The background for the British economy is well known: this is a slump worse than the Great Depression, both deeper and without the same vibrancy of the 1930s recovery. And with years of falling living standards, many households are squeezed. A survey by a consumer advocacy group found that 20 percent of participants borrowed money or used savings to meet the cost of food in April.
Britain’s coalition-leading Conservative party remains committed to a program of deficit reduction, despite criticism from the International Monetary Fund, placing more pressure on monetary policy.
“Our hopes now rest on either a significant and speedy recovery of our biggest trading partner, the euro zone economy (and that looks to be going in the wrong direction), or monetary policy,” UK-based fund manager Jim Leaviss wrote in a note to clients.
“In other words do the government’s hopes all rest on Carney doing something new and different, or massively increasing the scale of what the Bank of England has done before? If so we might all be disappointed.”
LITTLE STEERAGE ROOM
To be sure, the BOE has taken steps to goose growth, notably making changes in April to a program designed to lend money to banks for lending on to households and businesses.
Not only has inflation been above the BOE’s 2 percent target for more than three years – it now stands at 2.8 percent – prices in the inflation-protected bond market imply investors are demanding 3.1 percent over 10 years to compensate them for anticipated inflation.
That may give Carney little room to implement so-called forward guidance, a policy he has been associated with in Canada which involves trying to move market prices by telling investors how long low interest rates will be kept in place. The risks are that forward guidance either finds little traction or, conversely, erodes faith in the BOE’s commitment to fighting inflation.
Opening up a hot front in the currency wars is also not an attractive option, for Britain or for the BOE. There is considerable firepower on the other side, as shown by the willingness of the other major central banks to pursue easy money policies. As well, Britain, with its consumer-oriented economy, would suffer more from the high import prices brought on by a weak pound than it would benefit as an exporter.
Carney, therefore, is going to have a hard row to hoe. Expectations are high, morale is low and global conditions, with weakness in Europe and China, are not necessarily developing to Britain’s advantage.
When the new central banker does land, pressure will be high to “do something,” especially by subscribers to the Great Man theory of central banking.
Carney may end up looking back fondly on his pre-BOE days.
(James Saft is a Reuters columnist. The opinions expressed are his own)
(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)